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The Flavours and Fragrances Industry in India
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Saturday, 29 October, 2005, 08 : 00 AM [IST]
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Aparna Vedapuri
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The top five companies have a substantial presence in the Indian market, along with competition from Indian F&F houses such as SH Kelkar, Sachee Aromatics and Oriental Flavors & Fragrances. The Indian F&F market is estimated at around $225 million with the top five international houses accounting for 75% of the market. Flavours comprise 45% of the market while fragrances total 55%. However, fragrances are also used in the Agarbathis and Pan Masala/Zarda industries where figures are typically not disclosed. In the Agarbathis industry, many companies prefer to directly buy aroma-chemicals and blend their own fragrances. ITC is the exception, as it purchases blended fragrances, rather than aroma chemicals for in-house blending. Hence the F&F industry sales may not completely reflect these figures and estimates range to 10% higher.
The charts below give the competitive structure of the global and Indian flavours and fragrances for the global and Indian markets for the year 2004.
Chart 1: Competitive Structure of the World Flavours & Fragrances Market: Break-up by revenues for the year 2004
Chart 2: Competitive Structure of the Indian Flavours and Fragrances market: Break-up by revenues, 2004
Industry Segmentation
The F&F industry is segmented based on the main applications that flavours and fragrances find their way into.
n Flavours
- Bakery
- Confectionery
- Dairy (including frozen foods)
- Savoury (Chips, Namkeen, Instant savoury foods, other snacking products)
- Beverages (Liquor, Malted Food Beverages, Fruit Based)
- Tobacco (Smoking & Chewing)
- Toothpaste
- Pharmaceutical
- Meat, poultry and sea food flavours. (Practically non-existent in India)
n Fragrances
- Wash products (Soaps, Hand washes, Shower Gels)
- Detergents (Bars, Powders, Liquid, Pastes), Other fabric care products (Fresheners, softeners, brighteners)
- Skin Care (Creams, lotions, gels, corrective products)
- Talcs
- Hair Care (Shampoos, Conditioners, Hair Oil, Gel, Other styling products)
- Fine Fragrances and alcohols (Deodorants, sprays)
- Household Cleaners (Dishwashers, Floor, Glass, Multi-purpose & Toilet cleaners)
- Air Care (Air fresheners, Insecticides, Agarbathis)
- Industrial Applications (Leather, Paints, Gas - negligible usage)
- Tobacco (Pan Masala, Gutkha)
The flavours market is highly fragmented in the bakery, savoury and confectionery segments with buyers ranging from multinationals to individual Mom and Pop owned stores that manufacture on a small scale. In all the other segments, it is relatively more consolidated, as manufacturing technology becomes more complex, restricting the entry of smaller players. The fragrance market is highly consolidated, with most of the sales happening to large or mid-sized personal and home care players such as Unilever, Godrej, Nirma, Dabur, Reckitt Benckiser and Henkel. The exceptions are the Agarbathi segment and to some extent, the hair oils segment, which have a host of small players. The Indian fragrance market differs fundamentally from the global market in the segments that it consists of. Globally, while fine fragrances are a major component of sales, in India, the fine fragrance or perfume market is negligible, while soap and detergent fragrances form the chunk of unit sales. The chart 3 below provides an understanding of the value chain in the industry.
Trends affecting the industry
Traditionally, while flavours and fragrances were viewed as the most customised of all raw materials, and therefore commanded higher prices, in the last decade, prices have been pushed down consistently by large manufacturers. This trend has gained momentum, as there is increasing consolidation among
customers through mergers and acquisitions, improving their bargaining power. (Notable examples are Henkel's acquisition of Dial Corpn and in the Indian market, Dabur's acquisition of Balsara, both in 2004). Customers are already grappling with rising costs due to the upswing in oil prices. In most cases, manufacturing companies are unable to pass on these costs to consumers through price increases. Any price increases by F&F houses are therefore strongly resisted.
Another factor affecting the margins in the industry has been the overall increase in the prices of aroma and flavour chemicals, the building blocks for the industry. These have seen price increases due to the fluctuations in the petrochemicals industry. Further, till now, the Indian F&F industry has largely been focused on the large soap and detergent segments. As these segments mature, the fragrance industry faces stagnant sales and prices. In the case of flavours, since processed and instant food itself is a nascent industry in India, there is a long way to go before the market matures. Globally, major F&F houses are trying to counteract this trend by increasingly using their India and China hubs as sourcing centres for raw materials required by creative centres all over the world.
The F&F industry itself has seen some consolidation in the last five years - IFF acquired Bush Boake Allen (BBA) in 2000 while Haarmann & Reimer (owned by Bayer Corporation) and Dragoco (privately held) were taken over by investor EQT and merged to form Symrise in 2002-03. These moves are expected to confer better purchasing ability on F&F houses.
Fragrance and flavour manufacturing is not complex, involving mainly the blending of aroma chemicals. F&F houses have therefore been focusing on different areas in perfume and flavour synthesis technology such as countering specific malodors like sweat or encapsulation of flavours for timed release. This has been one avenue that F&F houses are using to maintain existing customers or gain higher prices for better performance. F&F houses are also focusing on developing captive materials that can provide them an edge in synthesis as well as discourage imitation. Another trend is to gradually move into long-term arrangements with manufacturers whereby each fragrance or flavour brief is only opened to two or three houses. In exchange for an assured chance to gain a certain amount of global business, F&F houses provide manufacturers with large discounts and first look rights at exclusive cutting-edge fragrance and flavour styles. This core-listing process is gradually being adopted across brands by most international manufacturers such as Unilever, Frito-Lays, Proctor & Gamble (P&G), Johnson & Johnson (J&J), making it very difficult for a newer supplier to break into such customers.
A key factor in this industry is the presence of stringent safety norms that often restrict the use of many chemicals. Apart from Indian government regulations, the flavour industry is self-regulated by the Flavour an
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